Dr. Ruth is going to borrow $5,000 to help write a book. The loan is for one year and the money can either be borrowed at the prime rate or the LIBOR rate. Assume the prime rate is 11 percent and LIBOR 1.5 percent less. Also assume there will be a $45 transaction fee with LIBOR (this amount must be added to the interest cost with LIBOR). a. What is the effective interest rate on the LIBOR loan? (Use a 360-day year. Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.) b. Which loan has the lower effective interest cost?
Input variables:
Amount of loan	$5,000
Loan term	360	days
Prime rate	11.00%	input as .xx
LIBOR rate difference from prime rate	-1.50%	input as -.xxx
LIBOR transaction fee	$45
Number of days in a year	360
Solution and Explanation:
Effective rate = (Interest / Principal) (Days per year / Days loan is outstanding)
a.
LIBOR loan:
LIBOR rate
Total interest plus fee
Effective rate on LIBOR loan